Dominant Currencies: How Firms Choose Currency Invoicing and Why it Matters*
Amiti M. Itskhoki O. Konings J.
1 August 2022Oxford University Press
Quarterly Journal of Economics
2022#137Issue 31435 - 1493 pp.
We analyze how firms choose the currency of invoicing and the implications of this choice for exchange rate pass-through into export prices and quantities. Using a new data set for Belgian firms, we find currency invoicing to be an active firm-level decision, shaped by the firms size, exposure to imported inputs, and the currency choices of its competitors. Our results show that a firms currency choice, in turn, has a direct causal effect on the exchange rate pass-through into prices and quantities. Moreover, the differential price response of similar firms that invoice in different currencies is large, persists beyond a one-year horizon, and gradually wanes in the long run. This results in allocative expenditure-switching effects on export quantities, which build up over time, suggesting a role for quantity adjustment frictions in addition to price stickiness. Our findings shed light on the mechanisms that make or break a dominant currency and the consequences it has for the international transmission of shocks.
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Federal Reserve Bank of New York, United States
University of California at Los Angeles, United States
Nazarbayev University, Graduate School of Business, Kazakhstan
Katholieke Universiteit Leuven, Belgium
University of Liverpool Management School, United Kingdom
Federal Reserve Bank of New York
University of California at Los Angeles
Nazarbayev University
Katholieke Universiteit Leuven
University of Liverpool Management School
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